Recon Ag Marketing

Greg Wagner is president of GWX – Ag Advisors. For over 25 years, he has specialized in advising agricultural producers and end-users on marketing and risk management decisions. GWX Ag Advisors integrates fundamental and technical analysis, combined with experienced historic perspectives of agricultural markets in the decision-making process.

Old Crop Soybean Prices & Cross Bred Support

Feb 04, 2013

There are both technical and fundamentals providing near-term support to soybeans. Producers need to be aware of both.

Last weeks decisive breakout from a descending triangle in March soybeans on Jan 30th, points to a further build of recent gains. The timing of the breakout occurred sooner than had expected. We noted in the F 1/25 blog post, the significance of the high volume session accompanying a rally from the low ($13.5150 Bu) made prior to release of the Jan 11 crop reports. That session saw volume surge 45% above that of the prior 5 trading sessions. Recall, volume surges accompanying decisive price moves serve to validate their legitimacy.

Likewise, the decisive breakout from that chart pattern on Jan 30th was accompanied by a high volume sessions. Note also, that Jan 30th rally saw a volume surge in the March soybean contract 35% above that of the prior 5 trading sessions. Again, volume validated that the price action was not an outlying fluke. The technical picture for the March soybean contract now projects additional near-term positive price performance.

However, this begs two primary questions:

1) What magnitude of additional price advances can be reasonably anticipated near-term?

2) What fundamental circumstances are either currently present or are will soon to be introduced as catalytic drivers for further gains?

First - on the issue of the magnitude to be expected in additional price advances. At this time, the market is rapidly approaching primary price objectives in March soybeans. Intra-session highs of $14.8650 Bu on Friday, Feb 1 are within reach of major resistance at $15 Bu. The last time March soybeans tapped the $15 Bu level was on Dec 17, 2012. It will be a formidable "line in the sand" to breach. In addition, significant resistance resides at the 150 day moving average, converging in the $15 Bu area. That momentum indicators have tracked up into the (at/or near) vicinity of overbought at $15 Bu, coupled with chart resistance makes that level "case-hardened", of sorts. Momentum indicators are also currently above levels seen when the March soybean contract last hit $15 Bu – and were not even at that price level, yet.

There is no shortage of traders and producers primed to sell into the $15Bu area basis March soybeans. I find it particularly curious that a number of higher profile spec traders seem to be quite animated about the prospect of selling a rally into the $15 Bu area basis March soybeans. Be that as it may, the selling is more likely than not to be absorbed – with some price pull-back to follow shortly thereafter. A fresh extra injection of demand, whether anticipated or actual, will then be required to provide the fuel to grind to the next level of resistance at $15.45 Bu. If we get that far, we can then address the next realistic area of resistance.

Secondly, in regards to fundamental drivers for further price gains – they retain their positive distribution across the US domestic balance sheet AND the Southern Hemisphere. Well known, is that the US soy export sales/shipment pace, as well as the pace of the crush must recede, whether separately or in tandem, to ensure the 135 Mil Bu 2012/13 end stock level does not erode further. There is not any leeway on this. Period.

The pace of the US soybean crush is not likely to slow significantly near-term. However, trade consensus expects n imminent slowing in soybean export sales. Conventional wisdom holds it will be accomplished via Chinese cancellations already on the books and a dramatic slowdown in the pace of exports as SA soybeans become readily available. The reality that current soybean export sales of 1.227 Bil Bu represent 91% of USDA’s forecast total of 1.345 Bil Bu for the 2012/13 marketing year. In other words, only 118 Mil Bu or 9% of additional sales are required to meet USDA’s forecast over the course of the next 7 months. As it stands, the sales trajectory is so out of sync that something has to give.

Prospect for soybeans prices pivot not on the fact that something indeed has to give, in the way of export sales/commitments, but rather the timeframe that in which it occurs. The USDA will then have some confirmation to begin the process of realigning export sales forecasts downwards towards a sustainable pace. Some insight into the answer should begin to surface within the next 4-8 weeks. It will require a demonstrated ability on the part of Brazil to get their soybean s out of the field, transported to port, and loaded onto a large flotilla of ships already waiting there for that purpose. If Brazil cannot execute these demanding tasks in a timely fashion, the likelihood that USA will, by default, be called upon as a supply reserve is virtually assured.

Granted, there are an exceptionally large number of unknowns in this scenario. However, the potential of Brazilian soybean exports to (once again) become ensnarled in a complex and inefficient logistical transport system are quite real. This leads to the question of at what point in time, shipping delay volumes become so acute as to go beyond foreign-end user’s comfort zone to ensure timely delivery to their home ports.

So, the size of the Brazilian soybean crop will continually overshadowed by the trades focus on their ability to meet in a timely fashion the historically large demand for it. The demand pressure for the Brazilian soy crop is already present. A flotilla of ships at their principal ports now awaits loading. Demurrage charges on ships docked idly waiting to be loaded is skewing on a daily basis the bottom-line landed cost to importers, as well.

Producers holding old-crop soybeans need to keep a very close eye on the $15 and $15.40 level basis March soybeans. The backwardation in old-crop soybean contracts reduces their appeal. While there is arguably a better technical profile in back month old crop contracts – suggesting steady/better price performance with the passage of time – the flat price discounts should discourage. It is advised to keep a close eye on your local basis levels and retain downside protection in short-dated options until old-crop sales are complete.